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October 30, 2020 – The Debtors filed an Amended Disclosure Statement for their Second Amended Plan and solicitation versions of their Plan and Disclosure Statement [Docket Nos. 1622, 1644 and 1645, respectively]. Also on October 30th, the Court issued an order approving (i) the adequacy of the Disclosure Statement, (ii) proposed Plan solicitation and voting procedures and (iii) a proposed timetable culminating in a December 15, 2020 Plan confirmation hearing [Docket No. 1633].
The solicitation Disclosure Statement contains numerous references to objections (existing and expected) raised in respect of the Plan by the Debtors' Official Committee of Unsecured Committee (the "UCC" or "Committee"). These references, largely inserted by the Debtors in their October 29th iteration of the Disclosure Statement include a 2-page recitation of the UCC's allegations in respect of the Debtors' FLLO financing (see further below). The Debtors sum up: "The Debtors vigorously deny the allegations in the Standing Motions and the Complaints. A hearing on the Standing Motion has not yet been scheduled. If granted, the Standing Motions may have a material negative impact on the Debtors’ ability to consummate the Plan."
The Disclosure Statement [Docket No. 1600] provides, “Following the retention of financial and legal advisors, the Debtors commenced comprehensive restructuring negotiations with their major creditor constituencies, including MUFG Union Bank, N.A., in its capacity as the administrative agent for the Revolving Credit Facility ('MUFG'), an ad hoc group of lenders under the FLLO Term Loan Facility (the 'FLLO Ad Hoc Group') and Franklin Advisers, Inc., as investment manager on behalf of certain funds and accounts ('Franklin'). The Debtors provided these creditors and their advisors with substantial diligence regarding the Debtors’ operations, held multiple telephonic conferences to discuss the Debtors’ business plan and potential estate causes of action and worked cooperatively with these stakeholders regarding a mortgage analysis related to oil and gas assets securing the Debtors’ prepetition secured debt.
The Debtors focused their conversations with Revolving Credit Facility Lenders on the terms of a potential debtor-in-possession financing facility and potential exit financing and their conversations with the FLLO Ad Hoc Group and Franklin on all aspects of a comprehensive restructuring, including the terms of a new money investment. The Debtors were able to reach an agreement with the FLLO Ad Hoc Group members and Franklin on the parameters of a restructuring transaction that included a $600 million fully backstopped rights offering within approximately three weeks from the start of negotiations. Over the course of the next month while the Debtors continued to negotiate the DIP Facility, the Debtors, the FLLO Ad Hoc Group and Franklin continued to refine the terms of the rights offering and other restructuring transactions in mid-May 2020.
As the primary terms of the debtor-in-possession financing neared conclusion, the Revolving Credit Facility lenders were included as part of the restructuring support agreement negotiations, particularly in light of the desire to de-risk the Debtors’ contemplated restructuring through committed exit financing. The Revolving Credit Facility Lenders and the FLLO Ad Hoc Group engaged directly on the terms of a global deal, including the terms of proposed exit financing. On June 18, 2020, the Revolving Credit Facility Lenders, the FLLO Ad Hoc Group, and Franklin reached agreement in principle on a global deal, which included $2.5 billion of exit facilities, comprised of a $1.75 billion revolving facility and a $750 million first lien last out term loan facility. The terms of the global agreement are documented in the Restructuring Support Agreement executed on June 28, 2020, with holders of 100% of the loans under the Revolving Credit Facility, holders of approximately 90% of FLLO Term Loan Facility Claims, holders of approximately 63% of the Second Lien Notes and holders of approximately 36% of the Unsecured Notes. Since the execution of the Restructuring Support Agreement, support for the Restructuring Transactions contemplated by the Plan has grown to holders of approximately 93% of the FLLO Term Loan Facility Claims. The Restructuring Support Agreement, and the Plan contemplated thereby, represents a significant achievement for the Debtors and is a testament to the strength and potential of the Debtors and their asset base.
The Plan contemplated by the Restructuring Support Agreement delivers significant value to stakeholders in the form of a deleveraged balance sheet and a significant new money investment that together will provide a path to exit in a volatile and challenging commodity price environment.”
The following is an amended summary of classes, claims, voting rights and expected recoveries highlighted below (defined terms are in the Plan and/or Disclosure Statement):
- Class 1 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is 100%.
- Class 2 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is 100%.
- Class 3 (“Revolving Credit Facility Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $752.0mn and expected recovery is 100%. Each holder of a Revolving Credit Facility Claim shall receive, in accordance with such holder’s prior determined allocation, either (i) Tranche A RBL Exit Facility Loans or (ii) Tranche B RBL Exit Facility Loans, on a dollar-for-dollar basis; provided that any Claims on account of accrued but unpaid Existing RBL Adequate Protection Payments shall be paid in full in Cash as set forth in Section II.A.1 of the Plan.
- Class 4 (“FLLO Term Loan Facility Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $1.525bn and expected recovery is 39.3% – 79.3%. Each Holder of a FLLO Term Loan Facility Claim shall receive a Pro Rata share of (i) 76% of the New Common Stock (subject to dilution on account of the Management Incentive Plan, the Rights Offering, the Put Option Premium and the New Warrants) and (ii) the FLLO Rights.
- Class 5 (“Second Lien Notes Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $2.471bn and expected recovery is 9.0% – 21.2%. Each Holder of a Second Lien Notes Claim shall receive its Pro Rata share of (i) 12% of the New Common Stock (subject to dilution on account of the Management Incentive Plan, the Rights Offering, the Put Option Premium and the New Warrants), (ii) the Second Lien Rights, (iii) the New Class A Warrants, (iv) the New Class B Warrants and (v) 50% of the New Class C Warrants.
- Class 6 (“Unsecured Notes Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $3.404bn and expected recovery is 2.3% – 4.4%. Each Holder of an Unsecured Notes Claim shall receive its Pro Rata share of (i) the Unsecured Claims Recovery and (ii) 50% of the New Class C Warrants.
- Class 7 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $1.036bn and expected recovery is ≥0%. Each Holder of a General Unsecured Claim shall receive its Pro Rata share of the Unsecured Claims Recovery Amount Allocation (the shared pool or “General Unsecured Claims Recovery Amount” currently set at $1.0mn) applicable to the Debtor against whom such Claim is asserted.
- Class 8 (“Intercompany Claims”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. The aggregate amount of claims is $0 – $102,158 and expected recovery is 0% or 100%.
- Class 9 (“Intercompany Interests”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is 0% or 100%.
- Class 10 (“Existing Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is 0%.
Committee Objection and Standing Motion
On October 26, 2020, the Official Committee of Unsecured Creditors (the “Committee”) objected to the Debtors’ First Amended Disclosure Statement [Docket No. 1550] alleging "glaring deficiencies" that render the "Disclosure Statement…both facially and substantively deficient with respect to critical Plan-related issues" and leaves unsecured creditors without any hope of arriving at an informed decision as to their Plan vote.
In a scathing attack, the Committee uses its objection to the Disclosure Statement as a vehicle to share more "pertinent facts lying just below the surface," facts that relate to months of pre-filing maneuvers designed to protect the Debtors, the Debtors' management, the Debtors' FLLO lenders and the Debtors' second-lien noteholders (with unsecured noteholder-turned second-lien creditor Franklin Resources Inc. playing a particularly villainous role, NB: Franklin also holding 12.4% of the the Debtors' equity at the end of 2019)…all at the expense of unsecured creditors. "There is perhaps no better time," the Committee suggests "for the reveal than in connection with a woefully deficient Disclosure Statement."
The Committee argues In its version of events (or "reveal," which it also intends to use as a basis for requesting derivative standing (the "standing motion") to prosecute estate claims and causes of action) that the Debtors entered into a series of transactions that allowed $1.5bn of supposedly silo-ed debt assumed during the acquisition of its "Wildhorse (BVL)" assets in February 2019 to escape that silo and "infect" unwitting creditors in other parts of the Debtors' capital structure. That "infection" occurred as a result of two "liability-management" transactions: (i) the refinancing of the $1.5bn Wildhorse (BVL) funded debt at which point the $3.8bn FLLO loan was created and which extended guarantees beyond the silo-ed Wildhorse (BVL) debt and (ii) a simultaneous exchange of "selected" unsecured bond debt (ie not offered to all similarly situated bondholders) for second lien debt, "uptiering" that bond debt in the capital structure. The Committee argues that "of those select few, none was more preferred and enriched as Franklin."
Those two transactions, however, the Committee argues, simply set the stage for the final and most damaging maneuver by Debtors long aware that they were sliding into an inevitable bankruptcy. In connection with the FLLO financing, the Debtors were required to submit mortgages to be recorded/perfected; with any Chapter 11 filing occurring within 90 days of delivery of those mortgages subjecting them to a "direct preference attack" under bankruptcy law The Committee accuses the Debtors of dragging their heels long enough to take those transactions beyond the 90-day time frame, thereby "squander[ing] $3.8 billion in preference claims against the FLLO lenders and Second Lien Noteholders."
The Committee notes that the complaint advancing its proposed "standing motion "against the Debtors et. al. runs to over 100 pages, but groups their claims into three categories otherwise touched on above:
- First, each of the legacy Chesapeake Debtors (i.e., Debtors other than the Wildhorse (BVL) Debtors) have claims against the FLLO lenders to avoid, as fraudulent transfers, the guarantees and liens they delivered in December 2019.
- Second, the proposed complaint seeks to avoid liens delivered to the Second Lien Noteholders, also as fraudulent transfers (ie the "up-tier" exchange) which were intended to benefit select creditors ("Franklin, in particular") over all other unsecured creditors.
- Third, the proposed complaint seeks remedy for the Company’s unjustifiable decision to squander $3.8 billion in preference claims against the FLLO lenders and Second Lien Noteholders.
The objection notes, “The Debtors came to bankruptcy with a particular case theory and strategy. Claims arising under the Debtors’ ‘FLLO’ term loan are, say the Debtors, the ‘fulcrum’ debt. The Second Lien Notes and unsecured claims are, in turn, ‘out-of-the-money.’ There is, according to the Debtors, no reasonable factual or legal basis to challenge the pre-petition capital structure. Thus, the FLLO lenders are due the entirety of the Chapter 11 estates. Nevertheless, the Plan delivers to the FLLO lenders only the lion’s-share of distributable value; magnanimously, it also delivers 12% equity to each of the Second Lien and unsecured creditor classes. But, what is bequeathed is immediately taken away: Through a separate rights-offering, the FLLO lenders and certain select holders of Second Lien Notes (primarily Franklin) redistribute to themselves just about all of the allocation reserved for the other Second Lien Noteholders and all unsecured creditors. And, of course, these parties deliver to themselves (and all Directors and Officers) full Plan releases.
The problem is this: None of it comports with the underlying facts of the case or, in turn, applicable law. Of more immediate concern: No reader of the proposed Disclosure Statement learns any of the pertinent facts lying just below the surface. It is time for those underlying facts to become known. And, there is perhaps no better time for the reveal than in connection with a woefully deficient Disclosure Statement.
With the filing of this Objection, the Committee has also filed motions seeking derivative standing to prosecute estate claims and causes of action against various parties, including the FLLO lenders and Second Lien Noteholders (the ‘Derivative Standing Motions’). Those motions – and the complaints attached thereto – are incorporated herein by reference. The paragraphs below provide a summary.
Key Facts, In Brief. The story of these Chapter 11 cases begins in February 2019. By that point in time, Chesapeake (like so many other gas-oriented E&P companies) was reeling under long-depressed commodity pricing. To help hedge against fallen gas prices, Chesapeake bought a new business: An oil drilling concern operating in the Eagle Ford, called ‘Wildhorse.’ The M&A transaction was structured as a stock purchase; all Wildhorse assets and liabilities were tacked onto the conglomerate as a new ‘silo’ of subsidiaries. Among other assumed liabilities were approximately $1.5 billion in funded debt. Importantly, that debt remained the exclusive province of the new subsidiaries, named the ‘BVL’ entities. No other Chesapeake entity became a guarantor or provided lien support for any of that Wildhorse (BVL) debt. Wildhorse would, in other words, rise or fall on its own, at least that was the transaction’s design.
But, in December 2019, Chesapeake pulled-off two ‘liability-management’ transactions that succeeded in putting off the day of reckoning (for a few short months) but now give rise to a whole host of legal issues. The first transaction was the refinancing of the $1.5 billion Wildhorse (BVL) funded debt. This is, in fact, how the FLLO loan came into existence. The FLLO refinancing was not, however, entirely contained within the Wildhorse (BVL) silo; rather, the FLLO was guaranteed by – and thus infected – the entire Chesapeake corporate structure. Trade creditors and unsecured bondholders, with claims at the multitude of legacy Chesapeake entities (entities operating in Oklahoma, Wyoming, Appalachia, etc. – far removed from the Eagle Ford), woke up one morning to find themselves sitting behind $1.5 billion in secured debt that had nothing to do with their obligor’s business operations and was never part of their historical credit-risk profile. And, their particular Chesapeake obligor did not receive any FLLO money. Every penny of it went to the Wildhorse (BVL) lenders.
Second, on the same day that all of Chesapeake became infected with Wildhorse (BVL) debt, the Company exchanged certain select unsecured bonds for second lien bonds (i.e., the Second Lien Notes). This opportunity was not opened-up to all unsecured noteholders; it was available only to a select few. And, of those select few, none was more preferred and enriched as Franklin. That is because Franklin had established a preferred relationship with the Company, forged over time as one of the Chesapeake’s leading investors. This deference to Franklin became part of the terms of the ‘up-tier’ exchange. The exchange closed with, and was effectively an addendum to, the FLLO issuance.
Chesapeake’s Efforts To Insulate Their ‘Liability Management’ Transactions From Preference Attack: As the Court may recall from the EXCO Resources Chapter 11 case, E&P refinancing (when the borrower is obviously insolvent) bears peculiar preference risks. That is because, in this circumstance, there often is insufficient time for mortgage perfection at the loan closing. Here, as was the case in EXCO Resources, the FLLO Credit Agreement provided that the mortgages were due for delivery/recording 60 days after the loan closed and funds transferred. Thus, if Chesapeake were to file for Chapter 11 within 90-days of delivery/recording, the mortgages would have been subject to direct preference attack. Chesapeake was fully aware of this and [Redacted] But, when the 90-day inflection point came, Chesapeake (shockingly) did not file for bankruptcy. They did not even secure any accommodation from either the FLLO lenders or Second Lien Noteholders in exchange for squandering $3.8 billion in non-insider preference claims against them. Instead, they handed them the Company, memorializing the deal in the RSA and, eventually, the Plan.
The Lien Position Today: The Plan relies on the assumption that the FLLO lenders and Second Lien Noteholders enjoy properly perfected, fully enforceable ‘blanket’ liens across the entire Chesapeake asset-base. Not so….That is not all. The FLLO Term Loan Facility Lenders and Second Lien Noteholders did ‘catch-up’ mortgage filings within 90-days of the Petition Date, covering nearly of the Company’s reserves.
In sum, nearly [redacted] of the Debtors’ estate value will be rendered unencumbered by a rather succinct, pro forma adversary proceeding under Bankruptcy Code Sections 544 and 547. There is, consequently, no way to reconcile the Plan’s value allocation with the case’s underlying facts and, in turn, applicable legal principle. The creators of the RSA/Plan simply believed the facts to be different than they are, and this detachment from reality is enough to ‘put a pin’ in the solicitation and confirmation process today. And, that is before considering all of the other litigation issues arising from the nucleus of operative fact.
Additional Estate Claims: The complaint attached to the Affirmative Claims Standing Motion spans nearly 100 pages, telling the full story of the case. The claims at issue in this proposed complaint may, for ease of reference, be placed in three categories.
First, each of the legacy Chesapeake Debtors (i.e., Debtors other than the Wildhorse (BVL) Debtors) have claims against the FLLO lenders to avoid, as fraudulent transfers, the guarantees and liens they delivered in December 2019. This litigation category relies on a substantial body of bankruptcy jurisprudence respecting the avoidance of ‘sister’ company guarantees/liens typified by the 11th Circuit’s decision in In re TOUSA, Inc., 680 F.3d 1298 (11th Cir. 2012) (sustaining fraudulent transfer claim against secured lenders receiving ‘sister’ company guarantees and liens shortly before bankruptcy). Indeed, a close examination of the facts at issue in TOUSA shows remarkable alignment with the facts at issue in these Chapter 11 cases.
Second, the proposed complaint seeks to avoid liens delivered to the Second Lien Noteholders, also as fraudulent transfers. The ‘up-tier’ exchange adorned to, and should be considered a part of (via the ‘collapsing’ doctrine), the FLLO refinancing. And, as the allegations contained in the proposed complaint make eminently clear, the intent was to advantage select creditors (Franklin, in particular) over all other unsecured creditors.
Third, the proposed complaint seeks remedy for the Company’s unjustifiable decision to squander $3.8 billion in preference claims against the FLLO lenders and Second Lien Noteholders. Today, it is the Debtors’ view that they had no duty to file early and protect the lien avoidance opportunity. And, more to the point, such position is inconsistent with law. See, e.g., Skorheim v. Flanders, 2011 WL 13175962 (C.D. Cal. Feb. 22, 2011) (debtor violates fiduciary duties by intentionally filing late to squander valuable preference claims). The complaint demands remedy in alternative ways, such as aiding and abetting liability and equitable subordination.”
The Second Amended Disclosure Statement adds sections and details that are directed at the Committee's arguments. They include:
- In section I, entitled "What Happens to Claims that are Disputed on the Effective Date?" the Debtors add: "The Committee of Unsecured Creditors (the 'UCC') asserts that the Plan should provide for an unsecured Claims administrator or similar functionary to object to General Unsecured Claims. The Debtors disagree."
- The Second Amended Disclosure Statement further states, "The UCC asserts a litigation trust should be established to preserve Causes of Action retained by the Debtors and those causes of action identified in the Standing Motions and the Complaints. The Debtors disagree."
- In Section N, which provides details on the proposed Management Incentive Plan, the Second Amended Disclosure Statement provides, "The UCC asserts the Debtors’ named executive officers are highly incentivized to support the Plan due to the Management Incentive Plan awards and assumption of their prepetition employment agreements upon the occurrence of the Effective Date. The Debtors disagree with this postulation. As of the date hereof, the New Board has not been formed and no determinations have been made with respect to the Management Incentive Plan, including the amount or structure of any award limits to be allocated under the Management Incentive Plan."
- Section R was added to the Second Amended Disclosure Statement to answer the question: "Why do Allowed Unsecured Notes and Allowed General Unsecured Claims receive different treatment under the Plan?" and states: "The disparate treatment of Class 6 and Class 7 is required by the differences between Class 6 and Class 7 Claims. The Unsecured Notes were issued by Debtor Chesapeake and guaranteed by 25 other Debtors. As a result, the Unsecured Notes are entitled to assert Claims at 26 Debtors. In contrast, General Unsecured Claims exist at only a single Debtor. As a result, they are only eligible to recover against the relevant Debtor. However, to the extent a particular general unsecured creditor has a valid General Unsecured Claim at more than one Debtor, such creditor will be entitled to assert and receive distributions on account of such General Unsecured Claim against all applicable Debtors, provided recoveries cannot exceed 100%."
- The Debtors acknowledge in the Second Amended Disclosure statement that "The UCC is likely to lodge an objection to confirmation of the Plan if the Debtors are unable to agree on the terms of a consensual restructuring with the UCC.
The Second Amended Disclosure Statement also provides a summary of the Committee's standing motion.
Exhibits attached to the Disclosure Statement [Docket No. 1645]:
- Exhibit A: Plan of Reorganization (filed at Docket No. 1644)
- Exhibit B: Corporate Organization Chart
- Exhibit C: Liquidation Analysis
- Exhibit D: Financial Projections
- Exhibit E: Valuation Analysis
- Voting Deadline: November 7, 2020
- Confirmation Objection Deadline: December 7, 2020
- Confirmation Hearing Date: December 15, 2020
Recovery and Liquidation Analysis (see Exhibit C of Disclosure Statement [Docket No. 1331] for notes)
About the Debtors
The Debtors are an independent exploration and production company engaged in the acquisition, exploration and development of properties to produce oil, natural gas and NGL from underground reservoirs: “We own a large and geographically diverse portfolio of onshore U.S. unconventional liquids and natural gas assets, including interests in approximately 13,500 oil and natural gas wells. We have significant positions in the liquids-rich resource plays of the Eagle Ford Shale in South Texas, the stacked pay in the Powder River Basin in Wyoming and the Anadarko Basin in northwestern Oklahoma. Our natural gas resource plays are the Marcellus Shale in the northern Appalachian Basin in Pennsylvania and the Haynesville/Bossier Shales in northwestern Louisiana.
In February 2019, we acquired WildHorse Resource Development Corporation, an oil and gas company with operations in the Eagle Ford Shale and Austin Chalk formations in southeast Texas, for approximately 717.4 million shares of our common stock and $381 million in cash, and the assumption of WildHorse’s debt of $1.4 billion as of the acquisition date of February 1, 2019. The acquisition of WildHorse expands our oil growth platform and accelerates our progress toward our strategic and financial goals of enhancing our margins, achieving sustainable free cash flow generation and reducing our net debt to EBITDAX ratio.”
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